third world debt ewp155

8/8/2019 Third World Debt EWP155

1/44

Still Waiting for the Jubilee:Pragmatic Solutions for the

Third World Debt Crisis

D A V I D M A L I N R O O D M A N

Jane Peterson,Editor


2/44

Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Repeating History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

International Debt Today . . . . . . . . . . . . . . . . . . . . . . . . . 18

Where Has All the Money Gone? . . . . . . . . . . . . . . . . . . . 25

The Devastating Spiral of Debt and Adjustment . . . . . . . . 30

Pressure to Lend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Continental Drift . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

The Year of Jubilee?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

What To Do about Lending. . . . . . . . . . . . . . . . . . . . . . . . 62

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Tables and Figures

Table 1:International Debt Crises since 1820 . . . . . . . . . . . . . . . . . 17

Table 2: Share of Government Spending Covered by Foreign

Borrowing and Devoted to Foreign Debt Service and Basic Social

Services, Selected Countries, 199697. . . . . . . . . . . . . . . . . . . . . 24

Table 3:Reasons IMF and World Bank Pressure for Structural

Adjustment Is Weaker Than It Seems . . . . . . . . . . . . . . . . . . . . . 48

Map:Heavily Indebted Poor Countries. . . . . . . . . . . . . . . . . . . . . . . 7

Figure 1: Number of Countries Not Servicing All Their Foreign

Debts, 18201999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Figure 2: Cumulative Foreign Debt of Developing and

Former Eastern Bloc Nations, 197099. . . . . . . . . . . . . . . . . . . . 19

THE WORLDWATCH INSTITUTE is an independent, nonprofit envi-

ronmental research organization in Washington, DC. Its mission is to foster

a sustainable society in which human needs are met in ways that do not

threaten the health of the natural environment or future generations. To

this end, the Institute conducts interdisciplinary research on emerging glob-

al issues, the results of which are published and disseminated to decision-

makers and the media.

FINANCIAL SUPPORT for the Institute is provided by the Compton Foun-

dation, the Geraldine R. Dodge Foundation, the Ford Foundation, the Richard

& Rhoda Goldman Fund, the William and Flora Hewlett Foundation, W.

Alton Jones Foundation, Charles Stewart Mott Foundation, the Curtis and

Edith Munson Foundation, David and Lucile Packard Foundation, John D.

and Catherine T. MacArthur Foundation, Summit Foundation, Turner Foun-

dation, U.N. Population Fund, Wallace Genetic Foundation, Wallace Global

Fund, Weeden Foundation, and the Winslow Foundation. The Institute also

receives financial support from its Council of Sponsors membersTom and

Cathy Crain, James and Deanna Dehlsen, Roger and Vicki Sant, Robert Wal-

lace and Raisa Scriabine, and Eckart Wintzenand from the many other

friends of Worldwatch.

THE WORLDWATCH PAPERS provide in-depth, quantitative and quali-

tative analysis of the major issues affecting prospects for a sustainable soci-

ety. The Papers are written by members of the Worldwatch Institute research

staff and reviewed by experts in the field. Regularly published in five lan-

guages, they have been used as concise and authoritative references by

governments, nongovernmental organizations, and educational institutions

worldwide. For a partial list of available Papers, see back pages.

REPRINT AND COPYRIGHT INFORMATION for one-time academic

use of this material is available by contacting Customer Service, Copyright

Clearance Center, at (978) 750-8400 (phone), or (978) 750-4744 (fax), or

writing to CCC, 222 Rosewood Drive, Danvers, MA 01923. Nonacademic

users should call the Worldwatch Institutes Communication Department at(202) 452-1992, x517, or fax a request to (202) 296-7365.

Worldwatch Institute, 2001

ISBN 1-878071-57-2

Library of Congress Control Number: 2001087743

Printed on paper that is 100 percent recycled, 80 percent post-

consumer waste, process chlorine free.

The views expressed are those of the author and do not necessarilyrepresent those of the Worldwatch Institute; of its directors, officers, or

staff; or of its funding organizations.


3/44

5

Introduction

Imagine the distress of Africa, and the Democratic Republicof Congo is the sort of place that comes to mind. Follow-ing nearly a century of traumatic subjugation by Belgium,

this European-designed nation eventually won independ-

ence, in 1960, and sank into violence within a week. After

five years of conflict, a man named Mobutu took power by

force with the help of the U.S. Central Intelligence Agencyand began a rapacious, 31-year reign.1

Though Mobutu skillfully cloaked his rule in the lan-

guage of African nationalismby giving his nation the sup-

posedly more authentic name of Zaire, for examplethe

dynamics of colonialism still held sway. He gave foreign com-

panies access to Zaires vast natural wealth, which included

an estimated quarter of the worlds copper and half its cobalt,

and threw his cold war allegiance to the West. In exchange,

the dictator won generous support from Western investors

and governments, including billions of dollars in bank loans

and half of all U.S. aid to black Africa in the late 1970s. Fromthese funds, and from export earnings, he siphoned off a per-

sonal fortune of some $4 billion by the mid-1980sa sum

not unduly diminished by the purchase of a dozen estates in

Continental Europe and chartered-Concorde shopping trips

to Paris. It would be wrong to suggest, however, that Mobu-

tu gave nothing to his country. He imported 500 British dou-

ble-decker buses, built the worlds largest supermarket, and

erected a steelworks that one banker said the country needed

like it needs central heating.2

The descent into hell began in 1975 when Mobutu,

ACKNOWLEDGMENTS: I thank Cheryl Goodman, Rob Mills, Joan

Nelson, Kunibert Raffer, Bruce Rich, Christian Suter, and Carol Welch

for reviewing early drafts of this paper or the State of the Worldchapter

from which it grew. I am greatly indebted (the metaphor will not be

denied) to my colleagues Hilary French, Brian Halweil, Michael Renner,

and Payal Sampat for their reviews. Thanks also to intern Bryan

Mignone for his capable assistance during the summer of 2000, to Art

Director Liz Doherty for turning the manuscript into a Paper with her

usual competence, and to Denise Warden for shepherding us through

the process. And I thank Jane Peterson, editor and friend.

To my wife Hoangmai Pham I owe an unpayable debt, for it is she who

lost most in my struggle to be writer, father, and husband all at once.

Last, I thank my little son Benjamin, as my father once thanked me, for

making sure I got up early every morning to write. To him I dedicate

this work.

DAVID MALIN ROODMAN is a Senior Researcher at the Worldwatch

Institute, where he writes about the economics and political economy

of sustainable development. Mr. Roodman graduated from Harvard

College with a degree in theoretical mathematics. His book The Natural

Wealth of Nations: Harnessing the Market for the Environmentappeared in

1998 and argued that overhauls of government taxation and spending

policies are needed to make economic development environmentally

sustainable. During academic year 199899, Mr. Roodman took leave

from the Worldwatch Institute to take a Fulbright Scholarship in Viet-

nam. He now works part-time in order to care for his son.

Figure 3: Net Transfers on Lending into Developing and

Former Eastern Bloc Nations, Estimated by Type of

Lender, 197099. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Figure 4:Long-term Official Lending to Low-income Developing

Countries, 197099. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Figure 5: Gross Domestic Product per Person, Latin America

and Africa, 195099 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Figure 6: Number of Countries Not Servicing All Their Foreign

Debts, by Region, 197099 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Figure 7:Multilateral Lenders: Total Assets and Cumulative

Loans to 41 Heavily Indebted Poor Countries, End of 1998. . . . . . 65


4/44

7INTRODUCTION

Heavily

Indebted

Poor

Countries

MAP

ListedbyWorld

Bank(41)

Notlisted,butcomparablyindebtedandpoor(6)

Source:

See

endnote

5.

6 STILL WAITING FOR THE JUBILEE

caught short by a plunge in the price of copper, threatened to

default. For the next 15 years, he used his geopolitical lever-

age to force his creditors to defer his debt paymentsor to

cover them with new loans. He then essentially defaulted on

the World Bank and the International Monetary Fund (IMF).

Meanwhile, Zaire entered a brutal economic slide. By themid-1980s, the swollen bellies of the hungry became a com-

mon sight. A Belgian volunteer reported seeing a little girl

eating grass and another one who was eating the waste from

the brewery.She told me she hadnt eaten for three days.3

Today, Mobutu is deposed and dead, but his legacies live

on. His family holds his fortune, and his country holds his $12

billion debt. In a nation with an annual income of $110 per

capita, each resident theoretically owes foreign creditors $236.4

Zaires disastrous involvement with foreign borrowing is

one of the worst (and earliest) cases of its kind in the post-

colonial era. It represents, if in caricature, the debt troublesthat dozens of other poor countries have run into in recent

decades. Currently, to use the World Banks measuring sticks,

some 47 nations are very poorhaving a gross national

product (GNP) of less than $855 per personand heavily

indebted, with their governments owing foreigners the

equivalent of at least 18 months of export earnings. All but

10 of the 47 are in Africa. (See Map.) For most people in these

nations, life is hard. Civil wars, coups dtat, corruption,

AIDS, famine, illiteracy are all relatively common. And

almost no one thinks these countries can repay more than a

small fraction of their foreign debts, which now total some

$422 billion, or $380 per resident.5

The debt crisis in low-income nationsit is commonly

called a crisis, though it is actually a slowly developing,

chronic syndromeis one of two major strains of debt trou-

ble that have struck the developing world since the 1970s.

The first, which broke out suddenly in 1982, mainly

involved middle-income countries, such as Turkey, Mexi-

co, and most South American nations, as well as the com-

mercial banks they borrowed from (though low-income

countries were not completely immune). It largely spent


5/44

9INTRODUCTION

halved between 1982 and 1988. In the Philippines, a million

or more desperate peasants moved into the hills, where they

cleared erodible slopes of protective trees and farmed to sur-

vive. And in southeastern Brazil, immunization cutbacks

opened the way for a measles epidemic that killed thousands

of babies in 1984.7

The debt crisis in the poorest nations thus confronts the

world with a dilemma. Critics on one side of the issue point

to the theft and waste and ask why taxpayers in rich coun-

tries should let incompetent or unaccountable governments

off the hook. Debt is a promise to pay, and a promise is a

moral obligation. But critics on the other side, represented

most effectively by the international Jubilee 2000 coalition

of churches and nongovernmental organizations (NGOs),

decry the chains of debt that enslave the worlds poorest

nations to the richest ones and, they submit, choke off gov-

ernment spending for immunizing poor children or teachingthem how to read.

In 1999, the leaders of the seven leading industrial

nations (the G7) announced their latest response to the

debt crisis, the enhanced Debt Initiative for Heavily Indebt-

ed Poor Countries (HIPCs). It is easily the most far-reaching

debt reduction offer yet, and a sign of the power of Jubilee

2000. The HIPC initiative aims to cut the $205 billion debt

of 41 qualifying nations by some 45 percent within perhaps

five years. (Six comparably poor and indebted countries are

not listed for various reasons.) Additionally, Italy, the United

States, and the United Kingdom, among others, have prom-

ised to write off all their loans to the HIPC 41, which could

bring the total reduction to 55 percent.8

With the debt reduction initiatives, official creditors

have taken an important step toward resolving the current

debt troubles, and with another big push from the likes of

Jubilee 2000, they might go far enough to succeed. However,

the initiatives only attack the symptoms of debt crisis. Large-

ly designed by and for creditors, they do little to highlight,

much less address, the underlying causes. As a result, they

will almost certainly invite fresh crises in the poorest


itself in the early 1990s as banks and borrowing govern-

ments finally struck compromises on repayment.

The second strain spread gradually in low-income

nationsand has worsened to this day. It is different because

low-income countries, regarded as risky investments by

commercial bankers, have mainly attracted official lenders:aid agencies, multilateral lenders such as the World Bank

and the IMF, and export credit agencies (ECAs, which subsi-

dize a countrys exporters with cheap credit for their cus-

tomers). While commercial lenders followed the classic

manic-depressive cycles of private finance, first overrunning

countries in their eagerness to lend, then retreating en

masse, official lenders stayed on a more even keel.

For all their steadiness, though, official lenders also have

run aground in the poorest nations, and in a way that is

undermining the worldwide fight for sustainable develop-

ment. Hundreds of billions of dollars of official loans havedisappeared into corruption, capital flight, weapons buying,

white elephants, and projects that worked better on paper

than in practice. And now the need to service debts has cut

into government budgets for roads, environmental protec-

tion, primary education, and basic healthcare. Indeed, many

low-income debtors spent more servicing debts to the

worlds richest nations in the late 1990s than giving social

services to their own impoverished citizens. Meanwhile, pri-

vate investors and local entrepreneursthe proverbial haters

of uncertaintyhave been discouraged by doubts about

what debtor governments, cornered by their creditors, will

do next. Will they raise tariffs on exports? Or print money,

thereby feeding inflation?6

Because debt trouble set in gradually in low-income

countries, no one can point to a particular child dying in

Mozambique from tetanus or to a particular plot of forest

cleared by a poor farmer in Honduras and say with confi-

dence, Debt caused that. But the experience of middle-

income countries, where debt crisis developed with a

suddenness that spotlighted the link between cause and

effect, offers a vivid picture of its impact. In Mexico, wages


6/44

voked a debt crisis in middle-income nations. The project of

reform must proceed with realism to stand a chance of serv-

ing, rather than undermining, sustainable development in

the poorest nations. If they thrive, the rest of the world can

only benefit.

Repeating History

Progress, far from consisting in change, depends on

retentiveness....Those who cannot remember the past are

condemned to repeat it.

George Santayana,Life of Reason, 19050610

There can be few fields of human endeavor in which

history counts for so little as in the world of finance. Pastexperience, to the extent that it is part of memory at all,

is dismissed as the primitive refuge of those who do not

have the insight to appreciate the incredible wonders of

the present.

John Kenneth Galbraith, A Short History

of Financial Euphoria, 199311

These days, the future rushes at us so fast as to make thepast seem irrelevant; and to be sure, many of todays expe-riences are unprecedented in human history. The current

debt crisis, however, is not one of them. In fact, the history of

international lending repeats itself with remarkable regulari-

ty, which suggests that in the world of international finance,

people have done a poor job of learning from the past. At the

same time, this cyclicity means that there is much experience

to learn from as the world tries to do better next time.

Debt, like the wheel, is a useful invention whose origins

are lost to history. Unlucky Sumerians may have run up the

earliest known debts, recording them by etching lines in clay

tablets. Perhaps they were farmers asking their lords forbear-

ance on taxes, which were payable in bags of grain. Whatev-

11REPEATING HISTORYSTILL WAITING FOR THE JUBILEE

nations. Rich governments have made important financial

contributions to the development of poor nations: they have

stamped out smallpox, funded family planning programs

that have dramatically slowed population growth, and built

rural roads and schools. But as long as lending and borrow-

ing occur in ways that invite trouble, loans from foreign gov-ernments will probably do as much harm as good. 9

Several major problems lie at the heart of the debt crisis.

All reflect hard economic and political realities. Rich coun-

tries restrict imports of crops and clothing and other exports

of poor countries, effectively demanding loan repayment

while refusing the goods offered as payment. Official agen-

cies often lend to poor countries for reasons that have little

to do with aiding their development and assuring their abil-

ity to repay loans, and everything to do with winning geopo-

litical allegiancesor sales for Lockheed Martin and

Caterpillar. Loans proffered with more genuine intentions ofaiding the borrower run into another problem: they are sup-

posed to be repaid regardless of results, even though failure is

to be expected in the difficult business of development.

Finally, both the agencies that lend and the ones that borrow

are often insulated from the consequences of their actions.

This insularity gives free play to bureaucratic tendencies

toward arrogance, over-optimism, the pursuit of growth in

lending and borrowing for its own sake, and even corruption.

Stating each problem so starkly evokes solutions that are

simple in theory. Creditor countries need to buy more goods

from debtors. ECAs and other agencies need to put enhanc-

ing the borrowers ability to service debt before geopolitics

and domestic politics. An international bankruptcy process

is needed to make loan write-offs routine and require lenders

to bear some costs of failure. And so on.

In practice, however, reform is a challenge as complex as

it is vital. Powerful business lobbies, for example, protect

ECAs and import barriers; it will take an equally organized

political campaign to overcome them. And if official lenders

become too accountabletoo afraid of failurethen they

could fall prey to the very herd mentality that once pro-

10


7/44

13REPEATING HISTORY

lending was assuming in economic life. In the 1800s, inter-

national lending became a central artery of capitalism and

imperialism, and increasingly facilitated the gains and the

depredations of the industrial age. Within Europe and the

Americas, cross-border lending fostered economic develop-

ment that eventually lifted millions of people out of pover-ty. Countries that began industrializing earliest financed

canals and railroads and factories in places that began indus-

trializing later, such as the United States and the Italian

peninsula. Between 1816 and 1913, net capital exports from

Great Britain, the dominant international lender of the era,

climbed from some $80 million a year (in dollars of the day)

to more than $1.1 billion.15

One measure of the economic effectiveness of foreign

lending is that, since 1820, it has profited investors who

diversified and perseveredmore so than lending at home.

Foreign bonds, with their higher interest rates to reflect risk,were honored often enough to cover losses. But by the same

token, international lending facilitated the worst abuses of

capitalismthe Central American banana plantations or

South African gold mines or American cigar factories that

exploited workers in slave or near-slave conditions.16

If international lending has been a handmaiden to

industrialism, it has been an unruly one. From the boom and

bust in tulip bulbs, which sent Holland into an economic

depression in the 1630s, to the Asian crisis of 1997, the

volatility of financial markets has frequently exacted a harsh

economic price. In a review of international lending since

1820, Swiss sociologist Christian Suter identified four major

waves of international borrowing, occurring roughly every

50 years. (See Figure 1.) Each terminated with an outbreak of

debt service incapacitya widespread inability to keep up

with interest and principal paymentscausing banks and

bond investors to beat a hasty retreat. The worlds greatest

economic setbacks, including those in the 1870s, 1930s, and

1980s, all began this way.17

These cyclical shifts of capital into and out of developing

countries are not fully understood. But human psychology is


er the precise meaning of these markings, they reveal the

essence of debt, which has survived unchanged through the

bewildering innovations of modern finance: debt is a prom-

ise to pay. And creditis the acceptance of such a promise.12

Governments have long been major, if not dominant,

users of credit. To banks and bond investors, governmentsseem the safest bets around. During the late-twentieth-

century international lending boom, Citibank president

Walter Wriston expressed the faith in public borrowers when

he famously declared that countries dont go out of busi-

ness. And for governments, borrowing is tempting because

it offers a means of spending without taxingat least

until the loans come due. In the early 1800s, for instance,

governments learned to tap newly invented bond markets to

build canals or railroads, promising their investors the full

faith and credit of the rising industrial powerhouse of Penn-

sylvania, say, or the sovereign nation of Brazil.13

As the Western world has changed, so have the reasons

that governments borrow. Before the Industrial Revolution,

rulers took out loans mainly to support courtly extrava-

gances or make war. In the early 14th century, for instance,

King Edward III of England borrowed heavily from the lead-

ing banks of the day, which operated out of Florence, to fund

his side of the Hundred Years War against France. (He then

defaulted.) With industrialization came an important new

motivation for government borrowing: the pursuit of eco-

nomic development. This rationale was best articulated in

the early 1800s by Frenchman Claude-Henri Saint-Simon

and his disciples. In awe of science and technology, the

Saint-Simonians envisioned a utopia in which reason had

transformed not only production but government, in which

technocrats free from bias and political pressure would

finance and manage economic development according to

scientific principles. The Saint-Simonians offspring include

socialism, Marxism, the World Bank, and the IMFand faith

in lending for development wherever it is expressed. 14

The Saint-Simonians were off the mark in their unbridled

optimism, but not in their appreciation of the role that


8/44

15REPEATING HISTORY

nect two valleys that already had good transportation con-

nection via the sea. At the same time, local authorities built a

road over the mountains. In such cases, the cascade of new

bonds would temporarily cover payments on the old ones

(since the projects could not). But once one country default-

ed, creditors would lose confidence and stop lending to othercountries as well, and the crisis would expand, a pattern that

has sporadically affected commercial lending ever since.19

Another source of fragility in international lending

would then become apparent: the ambiguous legal relation-

ship between lenders and borrowers. It is hard for a lender to

enforce the law of contracts against a debtor when the debtor

is the lawharder still when the debtor is a foreign govern-

ment, and there is no clearly applicable law. As S.C. Gwynne,

a former U.S. bank loan officer, has put it, international

banks cannot collect a power plant in Thailand or a hospi-

tal in Dubai, or even a Caterpillar tractor in the jungles ofKalimantan. They cannot tag a banana crop in the Philip-

pines, or grab the copper as it comes out of the mine. 20

Defaults naturally angered the creditors; but in the end,

they always had to come to terms with their losses, however

reluctantly. After several U.S. states defaulted in the 1830s, one

prominent English bond investor excoriated the United States

as a nation with whom no contract can be made, because

none will be kept; unstable in the very foundations of social

life, deficient in the elements of good faith. Such indignation

is understandable, but misses the reality that sharing losses is

the companion of lending overshoot. Bankruptcy codes in

most nations, honed over centuries, recognize that letting a

bankrupt survive to do business another day is often in the

interest of all concerned. They also recognize that forcing

overeager lenders to take a loss teaches a healthy prudence. The

hole in international law where a bankruptcy code belongs has

not made international compromise less necessary. But it has

forced creditors and debtors to negotiate in ad hoc fashion, to

the detriment of all concerned, especially debtors. Between

1820 and 1975, a grueling nine years elapsed on average

between outbreak of a crisis and its resolution.21

clearly at work in the wildness of the swings. Ignorant of the

future, investors often look to each other for cues, and so

move in herds, through euphoria and panic. In a few years

in the 1870s, for example, net capital exports from Great

Britain zoomed from $250 million to $500 million a year

and then crashed to $100 million after foreign governments

started defaulting.18

Then, as now, investors drew confidence from various

rationales during the upswings, many of which contained

truthBrazil, for example, with its rich resources, industrious

immigrants, and modern government, was the next United

States. But excessive investor enthusiasm made fertile ground

for waste and fraudand, eventually, default. In the 1920s,

for instance, Colombias federal government borrowed $150

million ($1.4 billion in 2000 dollars) to drill a rail link under

a 3,000-meter (9,000-foot) mountain range in order to con-

STILL WAITING FOR THE JUBILEE14

1820 1840 1860 1880 1900 1920 1940 1960 1980 20000

10

20

30

40

50

60Number

Source: See endnote 17.

Number of Countries Not Servicing All Their ForeignDebts, 18201999

FIGURE 1


9/44

17REPEATING HISTORY

ApproximateDebtwith

Period

SelectedMajorDebtors

SelectedMajorCreditors

PaymentProblem

s

(billion2000$)

182630

G

reece,LatinAmerica,Spain

Britishbondinvestors

3

184045

M

exico,Portugal,Spain,nineU.S.states

BritishandFrenchbondinvestors

6

187582

E

gypt,Greece,LatinAmerica,Ottom

an

Britishbondinvestors;

Germanbanks;

40

E

mpire, 1Spain,Tunisia,10southern

U.S.states

Frenchgovernment

18901900

G

reece,LatinAmerica,Portugal,Serbia

GermanandBritishbondinvestors;

20

BaringsBank

191118

B

ulgaria,Mexico,OttomanEmpire, 1

Russia2

Frenchbondinvestors

200

193140

C

hina,France,Germany,Greece,Hungary,

WorldWarIvictors(owedby

300

L

atinAmerica,Poland,Turkey,United

Kingdom,

Germany);U.S.government(owedby

Y

ugoslavia

othervictors);Westernbondinvestors

1982

L

atinAmerica,Philippines,Poland,Africa,

French,WestGerman

,Japanese,U.K.,U.S.

400

T

urkey,Yugoslavia

banks;G7governments;IMF,WorldBank

1Predecessorto

modernTurkey.2A

ccountedforasmuchas85percentofdefaultedam

ountinthisperiod.

Source:Seeend

note23.

TABLE1

InternationalDebtCrises

since

1820


Debtors, too, have usually had to swallow their anger.

Only on rare occasions has a new government come to power

and declared the debts of its predecessor to be legally odi-

ous. In 1898, the United States forcibly took over the Span-

ish colony of Cuba, but refused to assume its debts. The

former colonial government had used the money to put downan independence movement, even interring suspects in con-

centration camps. Loans used against the people, the United

States asserted, should not be the responsibility of the people.

In the early 1920s, a new government in Costa Rica refuted

foreign debts contracted by the just-deposed dictator, Federi-

co Tinoco Granados. U.S. Chief Justice and former President

William Howard Taft sat as arbitrator in the dispute and sided

firmly with Costa Rica. He pointed out that the bank knew

that Tinoco would squirrel away the money for personal use.

A few such exceptions aside, however, only great powers, or

nations exiting the capitalist financial system, such as Chinaand Russia after their communist revolutions, have dared

repudiate their obligations. Most governments opted to com-

promise with creditors over old loans, no matter how unfair

the burden, in order to get new ones.22

Remarkably, the same nations often held the roles of

debtor or creditor from crisis to crisis. Since 1820, Latin

American and East European nations have frequently run

into debt trouble. (See Table 1.) (Most of Africa was off the

lending map until the 1960s.) Worldwide, at least three quar-

ters of the countries that avoided debt problems in any of

four major lending periods between 1820 and 1979 did so in

the next one as well. The same persistence held among coun-

tries that didrun into trouble, except that the Great Depres-

sion had many one-time defaulters. This pattern holds even

when comparing 18201929 with 198086, with 64 percent

of problem debtors in the years between Napoleon and

Hitler resurfacing to haunt lenders in the era of Reagan and

Thatcher. Meanwhile, a handful of countriesBritain,

France, Germany, the United States, and Japanaccounted

for most overlending.23

This regularity suggests that the tendency to overborrow


10/44

bloc nations has shot upward with barely a pause in recent

decades, from $270 billion in 1970 to $2.6 trillion in 1999

(in 2000 dollars). (See Figure 2.) Private investorsmainly

commercial banks and bond investorshave led in lending,

with a cumulative $1.2 trillion in outstanding long-term

loans at the end of 1999. (Less data is available on short-termloans, which are due for repayment within one year.)24

Not far behind are official lenders, which generally come

in two stripes. Bilateral agencies, which belong to individ-

ual governments, held $550 billion in debts at the end of

1999. Next, the jointly funded multilateral lenders, includ-

ing the World Bank, the IMF, and regional development

banks in Africa, Asia, Europe, and Latin America, were owed

$440 billion. Official lenders can also be categorized by pur-

pose: export credit agencies, all of which are bilateral, exist

to stimulate a nations exports of wheat or weapons or con-

19INTERNATIONAL DEBT TODAY

0.5

1.0

1.5

2.0

2.5

3.0Trillion 2000 Dollars

0

Long-term debt to IMF, World Bank,other development banks

Long-term debt to governments

Long-term debt to private lenders

Short-term debt, mainly to private lenders,due for repayment within one year

1970 1975 1980 1985 1990 1995 1999


Cumulative Foreign Debt of Developing and FormerEastern Bloc Nations, 197099

FIGURE 2

or overlend emerges from deep within a nations character

and history. One generalization that seems useful is that the

most internally divided nations make the most troubled

debtors. Almost all Latin American states, as well as the

Philippines, inherited from their colonial rulers Spain and

Portugal an extreme concentration of wealth in the hands ofthe few, which has been perpetuated down through the cen-

turies. These powerful elites have generally fought off gov-

ernment efforts to tax them and help those less well off. For

leaders of such divided societies, foreign borrowing is tempt-

ing as a way to aid one group by, say, financing coal plants

to generate jobs and cheap power, without taxing another

groupor at least to forestall the day of reckoning.

The current debt crisis stands apart from past ones in

that governments have been not only the major borrowers,

but major lenders. Nevertheless, its roots are deep. In the

recent lending cycle, as in all those before, many loans havebeen put to good use while others have not. And the awk-

ward drama of overshoot, crisis, and compromise is once

again playing itself out on the international stage. The

cyclicity suggests that only a serious attempt to learn from

history can prevent yet more troubles in the decades ahead.

International Debt Today

Modern international debt troubles are at once a familiartale and a standout in the annals of finance. The latestlending upswing began in earnest in the late 1960s. It was

punctuated by spectacular international crashes in 1982 and

1997, as well as numerous smaller crises, from Zaires near-

default in 1975 to Ecuadors troubles in 1999. Most disturb-

ing for the present, a chronic debt problem has taken shape

in the worlds poorest nations. The terrain of modern inter-

national lending troubles is therefore quite complex, and

best approached at first through the numbers.

The cumulative debt of developing and former Eastern



11/44


developing and Eastern bloc nations then owed foreigners,

about $250 billion became problem debt, meaning that the

countries had to defer or cancel promised payments on it

during the 1980s.27

Yet the crisis of 1982 left surprisingly slight marks on the

overall upward trend in debt: it is just discernible in Figure 2as a tiny dip during 1988. One reason for the deceptively

smooth rise is that when debtors have fallen behind on their

interest payments in recent decades, creditors have lent

more to cover part of the interest and avoid formal default.

As a result, many nations emitted cash to the rest of the

world even as they went deeper into debt.

Official creditors have moved on a far different track

from the commercial lenders who were at the center of the

1982 crisis. The contrast appears most sharply in statistics on

net transfers on lendingthe differences between what

countries receive in new loan disbursements each year andwhat they spend making principal and interest payments on

old ones. (See Figure 3.) Net transfers between commercial

lenders and their borrowers have swung wildly since 1970.

But net transfers from official lenders rose steadily between

1970 and 1981, from $8 billion to $45 billion (in 2000 dol-

lars), then gradually went negative as grace periods expired

and bills for interest and principal payments came due. Even

the huge IMF and World Bank bailout packages for Brazil,

Indonesia, South Korea, and other countries since 1997 only

sent transfers positive momentarily. As a result, developing

and former Eastern bloc nations gave official creditors $40

billion more between 1990 and 1999 than they received from

those creditors.28

The lowest-income countries still received more as a

group from official lenders than they paid in the late 1990s

but only barely, and some individual countries received less.

(See Figure 4.) Many low-income countries are only main-

taining the appearance of fully servicing their debts by bor-

rowing still morea sure sign that a good share of their debt

is unpayable. Today, some 47 nations, labeled here the

Worldwatch 47, are heavily indebted and poor according


struction services by lending the purchase amounts to for-

eigners, or by guaranteeing repayment of commercial loans

for the same purpose. They held $390 billion of the debt of

developing and former Eastern bloc nations. And aid agen-

cies, both bilateral and multilateral, aim to help poor coun-

tries develop.25

On the borrowing side, official bodies dominate. At the

end of 1999, governments owed or guaranteed fully 81 per-

cent of the outstanding foreign debt, in the latter case prom-

ising to repay if a domestic borrower, such as an electric

utility, does not.26

In the ideal, governments and government-backed bor-

rowers would have invested all this money wiselyin every-

thing from public railroads to business expansion to

educationin order to earn enough foreign exchange to

repay the loans. In practice, however, countries often wasted

substantial sums through corruption, arms buying, and proj-ects that had as much to do with prestige and politics as eco-

nomics, such as expensive dams. All these uses weakened

borrowers ability to repay debts. (See Where Has All the

Money Gone? below.) To complicate matters, falling prices

for key exports of many developing countries since the

1970s eroded their ability to earn foreign exchange.

The debt crisis that struck in 1982 has been the most

spectacular symptom of these problems. In 1980 and 1981,

U.S. Federal Reserve Chairman Paul Volcker hiked short-term

interest rates to an unheard-of 20 percent in order to fight

inflation. Volcker won his battle, but only after raising inter-

est rates on many outstanding international bank loans and

slowing the global economy. High interest rates and global

recession lit the dry tinder of a decade of excessive lending

and borrowing. In August 1982, the Mexican Minister of

Finance, in the words of a U.S. Treasury Department official,

showed up at our doorstep and turned his pockets inside

out. Mexico announced that it was close to defaulting on

$80 billion it owed to U.S. and other banks. As in Asia in

1997, the crisis then exploded as commercial banks retreated

from dozens of countries. Altogether, of the $800 billion that


12/44


bilateral creditors 37 percent, and multilaterals 32 percent.

(Excluding the fallen giant Indonesia, official creditors dom-

inate even more: bilaterals held 45 percent of the debt and

multilaterals 38 percent.) These figures may understate the

problem: debt cancellation campaigners at Jubilee 2000 in

London have argued that Haiti, Jamaica, Zimbabwe, andsome other nations that exceed the World Banks criteria for

poor and heavily indebted are also deep in debt trouble. 30

What is beyond debate is that the countries meeting the

World Bank criteria are among the most troubled on earth.

Thirty-seven of the Worldwatch 47 rank in or just above the

U.N. Development Programmes lowest category of human

development. This generally means that babies born there

can be expected to live 4050 years, that fewer than half the

children and young adults attend school or college, and that

barely half the adults can read. Despite all the problems,

1970 1975 1980 1985 1990 19950

5

10

15

20

25

30

35Billion 2000 Dollars


1999

Long-term Official Lending to Low-income DevelopingCountries, 197099

FIGURE 4

Amount consumed by principal andinterest payments on old long-termofficial loans.


to criteria set by the World Bank, generally meaning that

each has a GNP per capita under $855 a year, and that itsgovernments foreign debts are equivalent to at least 18

months of export earnings.29

The Worldwatch 47 include most of Africa, as well as

Bolivia, Guyana, Honduras, and Nicaragua; Afghanistan and

Pakistan; and Cambodia, Indonesia, Myanmar, and Vietnam.

Together, these nations owed $422 billion to foreign credi-

tors at the end of 1999. That is equal to $380 per resident

on the debtor sidea substantial sum in such poor coun-

tries, but equivalent to only 11 months of Western military

spending. Commercial banks held 31 percent of the debt,

1970 1975 1980 1985 1990 1995 2000-150

-100

-50

0

50

100

150

Transfers into Borrowing Countries


(Billion 2000 dollars)

Commercial lenders

Official lenders

Net Transfers1 on Lending into Developing and FormerEastern Bloc Nations, Estimated by Type of Lender,197099

FIGURE 3

Note: The swings in commercial lending have mainly af fected middle-income countries.1Net transfers are disbursements of new loans minus interest and principal payments onold ones.


13/44

25

their debts. Economist Daniel Cohen at the Organisation for

Economic Co-operation and Development in Paris has

drawn on the experience of middle-income debtors in the

1980s to project how much poor countries will ultimately

pay on their loans from both commercial and public lenders.

His techniques suggest that the Worldwatch 47 are political-ly and economically capable of paying back $131 billion, or

about 31 percent of their $422 billion in debt. The other

$291 billion, this implies, is gone for good.32

These stark numbers confront the world with a dilemma.

Should official creditors cancel most of their loans to coun-

tries in such desperate straits? Or will annulment only

reward corruption and dictatorship? The numbers pose the

dilemma, but they cannot untangle it. Doing thatassessing

how best to end the official debt crisis and prevent its recur-

rencerequires peering behind the cold numbers. The next

three sections present the tragedy in all its dimensionshuman and environmental, economic and political. They

describe the waste that led to the crisis, and official creditors'

failed attempts to end it by lending still more. And they

examine how lenders came to be agents and accomplices of

the debacle.

Where Has All the Money Gone?

After years of studying our foreign aid program, we havelearned that foreign aid is only as good as the recipient

government. Foreign aid only reinforces the status quo. It

cannot transform an antidemocratic process working

against the majority into a participatory government

shaped in its interests. Where the recipient government

answers only to a narrow economic elite or foreign cor-

porations, our aid not only fails to reach the hungry,

it girds the very forces working against them.

Frances Moore Lapp, Joseph Collins, and Peter

Rosset , World Hunger: Twelve Myths, 199833

WHERE HAS ALL THE MONEY GONE?

many of these countries are forced to spend more on foreign

debt service than on basic social services. (See Table 2.) In

Zambia, the government devoted 40 percent of its national

budget to foreign debt payments in 1997 and only 7 percent

to basic health and education, clean water, sanitation, fami-

ly planning, and nutrition combined. The death rate amongchildren there is rising, partly because a third of those under

five have not received the vaccines they need, even though

they are cheap and effective.31

Also beyond debate is that these countries are so deep in

debt that most can repay only a fraction of their loans.

Today, you can buy commercial IOUs of Benin or Rwanda for

about 10 cents on the dollar. Honduras commercial debt

goes for 25 cents on the dollar. Private investors, in other

words, do not expect the Worldwatch 47 to repay most of


Share Covered Share Devoted Share Devotedby Foreign to Foreign to Basic Social

Country Borrowing Debt Service Services

(percent)

Belize2 8 6 20Benin3 29 11 10Bolivia3 16 10 17Burkina Faso3 20 10 20Cameroon4 36 36 4El Salvador2 47 27 13Jamaica2 14 31 10Nepal3 33 15 14Nicaragua2 14 14 9Zambia3 13 40 7

1Basic social services include basic health and education, clean water,sanitation, family planning, and nutrition. 2Data for 1996. 3Data for1997. 4Data for 199697.Source: See endnote 31.

TABLE 2

Share of Government Spending Covered by ForeignBorrowing and Devoted to Foreign Debt Service andBasic Social Services, Selected Countries, 1996971


14/44

27WHERE HAS ALL THE MONEY GONE?

Borrowers spent billions more on weapons. At best, the

tanks and planes were the economic equivalent of Swiss

bank accounts: financial sinkholes. At worst, they were tools

of repression and impoverishment in the hands of despots.

During 197282, non-oil-exporting developing countries

spent an amount equal to 20 percent of their borrowings onarms from western exporters, according to the Stockholm

International Peace Research Institute. Rough estimates indi-

cate that sub-Saharan Africa imported $7 billion in weapons

in 1987, and $1 billion in 1997 (the decline being a sign of

the end of cold war). These imports fed internal or cross-bor-

der wars involving at least 17 African debtor nations, includ-

ing Angola, Ethiopia, Liberia, and Uganda. In 1999, the

Indonesian military, a longtime customer of western lenders

and arms manufacturers, used British Hawk fighter jets to

back its violent rampage against East Timorese who had

voted for independence. As U.N. peacekeeping troops movedin, the country defaulted on $250 million in loans for the

Hawks. The British government then swooped in to save the

banks since it had guaranteed the loans. In effect, British tax-

payers paid for the Hawks used over East Timor.37

The evidence of the extent of theft and arms buying

seems to imply that the debt crises in low-income countries

is a simple matter of despotism run amok. Indeed, few of

the Worldwatch 47 had mechanisms to hold governments

accountable to the governed, such as a legislature elected

through free and fair elections. Their average score on Free-

dom Houses seven-point political rights scale was a high 5.9

in the 1970s and 1980s (indicating a lack of political rights)

and 5.1 in the 1990s.38

But the truth is more subtle. Following the historical pat-

tern, debt trouble has arisen most in nations that are deeply

rivenwhether by wealth, as in Latin America, or by ethnic-

ity, as in Africa, where colonial powers stamped a coarse

political map over a finer tribal tapestry. In Bolivia in the

mid-1980s, the wealthiest fifth of the people earned 15 times

as much as the poorest fifth; this societal division led to a

degeneration of politics into...fierce battles of the ins ver-


During their annual gathering in 1999, the leaders of theG7 launched the enhanced Debt Initiative for HeavilyIndebted Poor Countries, which set a goal of canceling about

45 percent of the government debt of 41 eligible poor coun-

tries. It seemed a generous move, but it was in fact a recon-

ciliation with reality, since most of the debt will probablynever be repaid. The reconciliation was only partial at that:

economist Cohen estimates that the HIPC 41 can repay

roughly $49 billion of their $205 billion debtfar less than

they would still owe on paper.34

Such big losses provoke a blunt question: Where did all

the money go? It is impossible to make a precise accounting.

In the electronic age, disbursed loan monies move with the

speed of lightning. And many of the people and organiza-

tions moving the money cloak their operations in secrecy.

Among the Worldwatch 47, the 17 included in Transparency

Internationals (TIs) 2000 corruption survey scored an aver-age of only 2.6 out of 10 (with a lower number indicating

more corruption). In addition, the relationship between how

loans are used and how easily they are repaid is complex.

Some countries, for example, may have put their loans to

good use, only to encounter debt trouble as the rising price of

oil consumed their foreign exchange. Conversely, others may

have wasted much of their borrowings but stayed ahead of

their debts through strong economic growth.35

On balance, however, the scale of the debt trouble in the

poorest nations points to widespread waste, misuse, or fail-

ure of development projects. For instance, much of the

money borrowed from abroad in the name of the poor head-

ed right back out to foreign bank accounts held by rich com-

patriots. In Latin America, the rise in public foreign debt

during 197684 was roughly matched by the simultaneous

outflow of private capital to banks in New York, the Cayman

Islands, or other financial capitals. In Haiti, dictator Baby

Doc Duvalier pulled together a private fortune worth $1.5

billion. Worldwide, according to TIs rule of thumb, 1020

percent of the spending financed by export credit agencies

goes to kickbacks.

36


15/44

29WHERE HAS ALL THE MONEY GONE?

old Minister. Tanzania spent some $2 billion building roads,

which disintegrated nearly as fast as they were paved for lack

of maintenance. According to a World Bank review, 56 per-

cent of Bank-financed projects in Africa in the 1990s ended

with satisfactory results. But only 29 percent were seen as

likely to benefit a countrys development in the long run.41

Indonesia, the largest debtor among the Worldwatch 47,

has been home to some of the most financially and ecologi-

cally ruinous projects. Since the late 1980s, the countrys

pulp and paper industry has expanded almost eightfold on

the strength of loans and guarantees from North American

and European ECAs wanting to stimulate exports of machin-

ery. The industrial buildup has been financially risky, since

the companies have not arranged for an adequate, sustain-

able, legal supply of timber from tree plantations, according

to Christopher Barr at the Center for International Forestry

Research in Indonesia. And it has been ecologically destruc-tiveas companies have cleared 800,000 hectares (2 million

acres) of rainforest to feed the mills, and have established

vast tree plantations on land inhabited by indigenous

peoples. The economic crisis in Indonesia has thrown the

$13 billion in overseas debt of the pulp and paper industry

into doubt. Foreign bonds of the largest company, Asia Pulp

and Paper, sold for just 40 cents on the dollar in November

2000. Yet none of the plants has shut down. Rather, some

companies are building more plants in order, they say, to

repay their debts.42

It would be unrealistic to expect countries to use everypenny of loans perfectly. Sustainable development is

extremely difficult business. And rich countries have man-

aged to develop despite their own histories of government

waste and corruption. But the losses here are large enough

that the systemic problems cannot be ignored. And they

have been occurring long enough that lenders also bear part

of the responsibility: The disappearance of funds is no secret,

nor is the inability of the poorest countries to repay their

debt. Yet it is todays debtor governmentsnot the lenders,

and not, in many cases, the predecessor governments that


sus the outs, according to economists Juan Antonio

Morales and Jeffrey D. Sachs. One effect has been fiscal

indiscipline, since powerful high-income groups veto the

income and wealth taxes that would be needed to finance

public spending to create jobs or aid the poor. In the 1970s,

Bolivian governments borrowed heavily to expand the pub-lic payroll without raising taxes, and thus defer the underly-

ing political conflict between the elites and urban workers.

That made political sense but was consumption from the

point of view of loan repayment, not investment.39

Moreover, many authoritarians were genuinely ambi-

tious for their nations economic development. Unwitting

heirs of Saint-Simon, they took out loans to build their

dreams. In many cases, they used the money well. Indeed,

two big developing-country borrowersBrazil in the 1970s

and South Korea laterwon the imprimatur of economic

miracle for their rapid growth in production and exports.Brazil invested its massive foreign borrowings in dams and

nuclear power, in cement, steel, aircraft, and weapons man-

ufacture, and more. Whatever their environmental and

social merits, some of these investments paid off financially.

And South Korea poured money into everything from

schools to steel plants, industrialized rapidly, and brought

down poverty.40

That said, the vision of development embodied in many

countries investment programs was unrealistic or politically

distorted. Especially in the poorest nations, it was unrealistic

because it naively fixated on the most-visible aspects ofmodernitythe roads and rails, dams and pipelines that

writer Catherine Caufield calls the talismans of change. In

fact, these assets all depend on less-visible assets such as

skilled workers, reasonably competent government, rule of

law, an intact environment, and a fabric of small and medi-

um-sized businesses and civic organizations. These assets

were especially scarce in low-income nations, or were active-

ly undermined by the projects themselves. After Mozam-

bique gained independence from Portugal in the 1970s, its

Ministry of Education had five people, including a 23-year-


16/44

31THE DEVASTATING SPIRAL OF DEBT AND ADJUSTMENT

tributed to economic crisis. Within these nations, the poor

and the environment have paid the greatest price.

The shocks and strains of the global economy during the

past quarter century have affected nations first by disrupting

their balance of payments. When countries came to the

global market to sell their economic harvesttheir copper orcoffee or cocoaand used the proceeds to buy oil, machin-

ery, or bank credit, their books no longer balanced. Scores of

developing countries borrowed foreign currency to get by.

Such balance-of-payments borrowing can make sense for a

government the way that living off a credit card can make

sense for a worker laid off in an industry slowdown. If the

industry recovers quickly, then the worker will get a new job

before borrowing too much; or if the cutbacks are perma-

nent, the worker can use the line of credit to invest in train-

ing for a new career.

For the East Asian tigers, among others, things workedout well: they rode out the transient shocks, adjusted to the

longer-term strains, grew fast, and reduced poverty. But for

most developing countries, borrowing to balance payments

became the next stage in a dysfunctional relationship with

foreign credit. Their economies and export earnings did not

grow fast enough to keep up with the additions to their debt.

As a result, the borrowing effectively deferred tough eco-

nomic choices and made those choices more painful when

they arrived.44

The year 1982 was a watershed in balance-of-payments

lending. Before Mexicos fateful announcement, rich-countrybanks were cooperative, if increasingly nervous, providers of

ample finance to dozens of poorer nations. But afterwards,

the climate could not have been more different, as nations

from Argentina to Zambia repeatedly came within a hair of

defaulting. The worlds most powerful banks, governments,

and international lending agencies presented debtors with a

solid front and a stark choice: repudiate some of their debts,

alienate great powers such as the United States, and risk los-

ing all ability to borrow abroad for the foreseeable futureor

accept the debt burdens, and try, in the economists word, to


ran up the debtsthat have been expected to absorb the

costs by repaying loans in full.

The Devastating Spiral of Debt andAdjustment

The fact that so much of todays staggering debt was irre-

sponsibly lent and irresponsibly borrowed would matter

less if the consequences of such folly were falling on its

perpetrators.Today, the heaviest burden of a decade of

frenzied borrowing is falling not on the military or on

those with foreign bank accounts or on those who con-

ceived the years of waste, but on the poor who are hav-

ing to do without necessities, on the unemployed who

are seeing the erosion of all that they have worked for, on

the women who do not have enough food to maintain

their health, on the infants whose minds and bodies are

not growing properly because of untreated illnesses and

malnutrition, and on the children who are being denied

their only opportunity ever to go to school.[I]t is hard-

ly too brutal an oversimplification to say that the rich got

the loans and the poor got the debts.

James P. Grant, Executive Director, UNICEF, 198943

The years since 1973 have been troubled ones for the glob-

al economy. Oil prices and interest rates have gyrated attimes. Stock market investors and bankers have stampeded

into and out of emerging markets from Mexico to Thailand.

More subtly, rich countries have fortified their trade barriers

against many principle exports of developing countries, cost-

ing them billions of dollars. In response to all these pressures,

developing countries have often borrowed from foreign

commercial banks, the World Bank, or the IMF, hoping this

would tide them over the rough spots. But many countries,

especially in Africa, instead slipped into a downward spiral:

economic hardship led to borrowing and growing debt con-


17/44


and public investment usually plunged. Private investors

were spooked by doubts about the economic future of debtor

nations. And governments preoccupied with meeting their

next debt payments cut back on investment in infrastruc-

ture, health care, and education. As debtor economies ate

their seed corn, output fell, unemployment climbed, andpoverty spread.47

Another source of the growth slowdown was falling

demand and sagging prices for exports of debtor nations. In

the first half of 1985, for instance, Thailand exported 31 per-

cent more rice than a year beforeand earned 8 percent less.

An index of the terms of trade of non-oil-exporting devel-

oping countries, which measures how much they could

import with the earnings from a given volume of their

exports, fell from 100 in 1970 to 76 in 1985, before recover-

ing to around 85 by the late 1990s. Prices fell in part because

1950 1960 1970 1980 1990 20000

50

100

150

200

250Inflation-Adjusted, Indexed to 1950


Latin America

Africa

Gross Domestic Product per Person, Latin America andAfrica, 195099

FIGURE 5


adjust. Bowing to the inevitable, each troubled debtor

negotiated new repayment schedules with its creditors, to cut

payments in the short run. With support from the U.S. gov-

ernment, the IMF and the World Bank (which are interna-

tional financial institutions, or IFIs) then offered the debtors

new loans. But these adjustment loans were smaller thanthose the commercial banks had once offered, and did not

relieve most governments financial distress.45

In return for the new loans, the IFIs demanded that bor-

rowers make major economic reforms, known as adjust-

ment, stabilization, or austerity programsin theory,

the economic equivalent of retraining for the laid-off work-

er. In practice, the pressure to pay debts drove borrowers

economic policies as much as any blueprint drawn up by the

IFIs. For like families fallen on hard times, debtor nations

had few economic options. To squeeze foreign exchange out

of their economies, they had to spend less or earn more. Therebalancing had to occur within each governments budget,

through spending cuts or tax hikes. It also had to occur with-

in the nations trade flow, through higher export earnings or

lower import spending.

For most adjusting countries, already reeling from bal-

ance-of-payments problems, the full-repayment-through-

austerity strategy succeeded only in prolonging paralysis.

Between 1950 and 1980, gross domestic product (GDP) per

person had risen 105 percent in Latin America and 72 per-

cent in Africa. But between 1980 and 1999, GDP per capita

fell in Latin America and then gradually recovered for a netincrease of only 4.3 percent. It fell 6.2 percent in Africa over

the same period. (See Figure 5.) Statistical analysis by econo-

mist Daniel Cohen supports the conclusion that debt prob-

lems figured in the slowdown: the more vulnerable to

eventual debt trouble a country seemed to be in 1980, judg-

ing by vital signs such as its ratio of foreign debt to GDP, the

less it grew from then on, other factors being equal.46

The fundamental problem with austerity was that it put

short-term goals before long-term strategies for economic

development. In countries that practiced austerity, private


18/44

have affected health budgets, but available data did not per-

mit a clear determination.) Zaire fired a fifth of its school-

teachers in 1984, according to Susan George of the

Transnational Institute. Tanzania, a country once known for

nearly universal primary education, was forced to introduce

school fees in 1986, thus shutting out the poorest children.

50

Some of societys weakest members adjusted with their

lives. UNICEF estimated that half a million children died

each year in developing countries in

the late 1980s as economic hardship

slowed the long-term decline in child

mortality. In northeast Brazil, where

mothers struggled to feed themselves

and their families, the incidence of low

birth weight, which had held stable

around 10.2 percent of births in the

five years through 1982, jumped to15.3 percent in 1984. Infant mortality

rose too. In 1982, nine out of every 100

babies died in their first year, down

from 16 in 1977. But by 1984, the figure had climbed back

to 12. Meanwhile, in the southeastern state of So Paulo,

government immunization cutbacks opened the way for a

measles epidemic that killed thousands of babies.51

In many countries, government cutbacks and recession

caused layoffs and reduced the effective wages of those still

working. In Mexico, inflation-adjusted wages halved

between 1982 and 1988. Food prices tripled in the Jamaicancapital of Kingston as subsidies were slashed. Turkeys 1980

adjustment program led to price increases for goods sold by

government companies, such as gasoline and fertilizer,

which effectively cut workers wages by 45 percent between

1979 and 1985. Most of the burden of adjustment, con-

cluded World Bank Chief Economist Stanley Fischer in 1989,

has been borne by wage earners in the debtor countries.52

The stresses of adjustment have also taken a toll on the

environment, but again the story is complex. In Thailand,

the government lowered tariffs to stimulate exports of rice


Most of the

burden of

adjustment . . .

has been borne

by wage earners

in the debtorcountries.


each nation that tried to bring in more foreign exchange by

increasing exports of wheat or tropical timber was compet-

ing with dozens pursuing the same strategy. In addition, rich

industrial nations spent the 1980s and 1990s raising import

barriers against shirts and sugar and other exports of devel-

oping countriesand subsidizing their own exports of thoseproducts. Erasing these barriers today, estimates the World

Bank, would raise export earnings of developing countries by

more than $100 billion a yearenough, if it had been accru-

ing since 1982, to repay all the debts. In effect, rich countries

have demanded that poor countries repay debts but refused

the goods offered as payment.48

Like the benefits of borrowing, the costs of austerity have

been spread unevenly within debtor nations. In low-income

nations, where the debt crisis has arisen gradually, and is just

one cause of poverty, the effects are difficult to pinpoint. In

contrast, debt trouble arrived suddenly in the early 1980s inmiddle-income nations such as Brazil and Thailand and

Turkey, which makes the link between cause and effect clear-

er, and hints at the effects of debt trouble elsewhere. In

general, constituencies that supported the government

and gained from the original loans, such as the urban mid-

dle class and ruling elites, used their influence to shift costs

of repayment onto those less fortunate. There were excep-

tions: the poorest of the poorsuch as Guatemalan Indians

living in the mountains beyond paved roads and power

lineswere often too isolated from the commercial econo-

my to notice its ups and downs. And some small land-own-ing farmers who plugged into global markets benefited from

adjustments stimulus to exports. But they were the excep-

tions that proved the rule.49

As a group, for example, the poor appear to have suffered

disproportionately from adjustment-related government cut-

backs. Between 1980 and 1993, social spending fell in adjust-

ing nations, according to a World Bank study. And within

education budgets, primary educationincluding the one-

room schoolhouses in dirt-poor hamletstook larger cuts

than universities serving urban elites. (Similar trends may


19/44

IFIs argued, then investors would take risks again, economies

would grow, and tax revenues and foreign exchange would

flow into government coffers. Structural adjustment brought

the anti-government economics of Reagan and Thatcher to

the developing world.

Unfortunately, structural adjustment loans, like thebelt-tightening austerity loans before them, mainly succeed-

ed in perpetuating paralysis. With respect to core economic

policy goals, most of the evidence says that IFI-backed

adjustment programs have reduced investment, left inflation

unchanged, and given at most a modest boost to economic

growth and the balance of payments.56

In contrast with austerity programs, which had a certain

inexorable logic, structural adjustment stood on shaky theo-

retical ground. True, countless heavy-handed government

interventions were hampering economic development in

many countries in the 1970s. Bloated civil services and cor-rupt leaders drained away revenue. Complex, constantly

changing import controls bewildered traders. But it did not

follow that paring government down wholesale would bring

economic rebirth.

Historically, what has mattered most for development is

not whether governments intervened in the workings of the

economy, but the fine details of how they did so. The

economies that have grown fastest in the last 200 years

including China, Japan, South Korea, and the United

Statessaw extensive government involvement in trade and

industry. In a statistical survey of developing countries expe-riences with economic growth since 1975, Harvard econo-

mist Dani Rodrik found that two factors best predicted

the growth rate of an economy: how much the country

invested, and whether the government held the domestic

economy steady amidst the turbulence of the global

economy. Keeping inflation under control and the currencys

exchange rate realistic, major goals of basic austerity

plans, mattered. But the openness to foreign trade and

investment that structural adjustment aimed forpart

of globalizationdid not show up as significant by

THE DEVASTATING SPIRAL OF DEBT AND ADJUSTMENT 3736 STILL WAITING FOR THE JUBILEE

and rubber. This encouraged farmers to shift toward those

crops and away from more soil-damaging cassava farming.

But it also encouraged them to clear rainforests for new rub-

ber plantations. Economic recession slowed consumerism

and cut pollution by shutting down factories in many coun-

tries. But it also drove at least a million desperately poor Fil-ipinos into the forested mountains, where they cleared steep,

erodible slopes to grow food. Likewise, poor Venezuelans

splayed out along the tributaries of the Amazon to blast

rocks for bits of gold.53

Adjustment has also taken a toll on environmental pro-

tection agencies. Nine of 12 case studies of adjusting coun-

tries commissioned by the World Wide Fund for Nature

found such cuts. In Zambia, Tanzania, and Cameroon,

wrote project director David Reed, policymakers tried to

protect government employees while cutting out the funds

that would allow them to perform their jobs properly.In ElSalvador, environmental institutions were systematically gut-

ted over the years. Such cuts may hurt more in the long

term than the short term, since young environmental agen-

cies in developing countries often wield little effective power,

but will gain strength over time if properly supported.54

And the need for foreign exchange has spurred export-

oriented mining, logging, and agriculture in developing

countries. Several studies have found a statistical link

between high debt burdens and deforestation. Debt pressure

is also one reason many developing countries made their

laws more inviting to foreign mining companies in the1980s. In Tanzania, the share of mining in the countrys GDP

climbed 19 percent in the late 1980s.55

By the mid-1980s, it became clear that austerity was only

prolonging and deepening most borrowers problems with

debt and adjustment. In response, the World Bank and the

IMF increasingly pressed troubled debtors to make still deep-

er reforms in exchange for new loansto make structural

adjustments. If governments privatized state enterprises,

ended subsidies, removed barriers to foreign trade and

investment, and generally got out of the way of business, the


20/44


a-month hyperinflation drove these changes, not the later

pressure from IFIs. Natural and human disasters also ham-

pered compliance. In Malawi, in 1986, drought in the south-

ern half of the country and an influx of 700,000 hungry

refugees from war in Mozambique pushed the government

into reversing its commitment to end fertilizer and crop sub-sidies. Then too, lending millions of dollars to governments

uncommitted to reform bolstered forces protecting the status

quo. And the IFIs general hesitance to stop lending seriously

undermined their leverage. (See Pressure to Lend below.)60

During the 1980s and 1990s, the IFIs made adjustment

loans to every African nation. But according to a recent World

Bank report, only twoGhana and Ugandasustained much

commitment to reform. The authorized history of the World

Bank published in 1997 concluded: Perhaps the only argu-

ment that will convince the critics of reform [in Africa] that

they are wrong will be several cases of definite structuraladjustment successesand these have not yet occurred.61

The main, if unintentional, effect of adjustment loans,

thenfor both austerity and structural adjustmentwas not

to transform economic policy in debt-ridden nations. Rather,

it was to prolong the hope and insistence among creditors

that the nations would eventually pay all their debts. This

insistence left debtors staggering from one payment resched-

uling agreement to the next. In the end, the pursuit of full

repayment did not burnish the reputations of debtor nations

among investors the way the creditors argued it would.

Instead, it stymied economic growth and exacted a pricemeasured in the misery of those least able to defend against

it. And it increased the pile of unpayable debts it was meant

to diminish.


themselves.57

Peering deeper, the key to economic stability was politi-

cal cohesion. Most governments that stabilized their

economies amidst oil shocks, gyrating international interest

rates, and global recession had strong mechanisms for reach-

ing political consensus and compromise. Those mechanismsincluded democracy, as in South Korea and Thailand during

the recent Asian economic crisis, and social programs that

made almost everyone economically secure, as under the

dictatorship of Singapore. Lack of social cohesion, on the

other hand, led the likes of Bolivia to print money and court

hyperinflation rather than confront politically risky choices

about whose taxes to raise. The paths to high investment

were also diverse. In some countries, private entrepreneurs

took much of the initiative; in others, they were closely

supervised by government planners; in still others, govern-

ments did much of the investing themselves. What matteredmost was that it happened. The lesson of history, Rodrik

concludes, is that ultimately all successful countries devel-

op their own brand of national capitalism. When it comes

to economic development, one size does not fit all.58

Not only was the structural adjustment advice of ques-

tionable value, it was also regularly ignoredor unnecessary.

In dozens of case studies, independent economists and polit-

ical scientists have documented how borrowing govern-

ments typically sidestepped the promises they made in

adjustment agreements with the World Bank and the IMF, or

obeyed the letter but not the spirit, or agreed to steps they

would have taken anyway.59

The reasons for this surprising record are several. For one,

as Rodrik suggests, domestic politics mainly determined eco-

nomic policies. In Zambia, for example, in 198687, strikes by

government workers and riots over a 120 percent price

increase for staple foods forced the government to restore

food subsidies and abandon its structural adjustment pro-

gram. Bolivia, by contrast, didenact an adjustment program,

laying off state workers and raising taxes in 198586but

domestic political support for drastic steps to end 50 percent-


21/44

41PRESSURE TO LEND

waging geopolitical battles, generating contracts for compa-

nies back home, or increasing lending for its own sake.

Economist John Kenneth Galbraith has observed that in

commercial finance, speculative cycles share certain univer-

sal ingredients, including the extreme brevity of the finan-

cial memory and the popular imagination settl[ing] onsomething seemingly new in the field of commerce or

finance. Both those elements were present in the postwar

international commercial lending boom. By the late 1960s,

the retirement of bankers old enough to remember the

defaults of the 1930s enabled the historical amnesia of big

banks. And several seemingly new developments in the field

of finance appeared: the rise of the London-based Eurodol-

lar marketa regulatory twilight zone in which banks lent

to each other in a currency from one continent while oper-

ating on another; an avalanche of petrodollarsdeposits

from conservative oil sheiks seeking the safety of big banks;and rapid economic growth in countries such as Brazil and

Kenya. The Eurodollar market became the machinery for

arranging large international loan deals. Petrodollars provid-

ed a good share of the fuel. And developing countries that

were experiencing growth spurts comprised the seemingly

safe customer base.64

As the competition for market share heated up between

the likes of Chase Manhattan and the Bank of Tokyo, man-

agers pressed their loan officers to get dollars out the door.

Author Anthony Sampson captured the mood in his descrip-

tion of the 1980 World Bank-IMF meeting, which, as a gath-ering of the worlds finance ministers, attracted eager

bankers:

Through the main entrance more bankers are swarming

in, whose roving eyes suggest a very practical

purpose.Across there a pack of Japanese bankersis con-

verging on a finance minister. Along the corridor a grave-

looking French bankerlooks as if he is in full pursuit of

new African prey.Many of them begin to look not so

much like bankers as financial middle-men, contact men,

orcould it really be?salesmen.For these men who


Pressure to Lend

Today marks the beginning...of a period that will be

eventful, perhaps decisive, for us and for the world.

[T]he United States and other like-minded nations find

themselves directly opposed by a regime with contraryaims and a totally different concept of life.I believe that

we should make available to peace-loving peoples the

benefits of our store of technical knowledge[a]nd

should foster capital investment in areas needing devel-

opment.The old imperialismexploitation for foreign

profithas no place in our plans. What we envisage is a

program of development based on the concepts of demo-

cratic fair-dealing.

Harry S. Truman, inaugural address, 194962

The first thing a good banker looks for when someoneapproaches her for a loan is reassurance. That is whycredit derives from ancient words for believe, entrust,

and heart. Typically, a banker will ask a potential borrow-

er for a credit history, a credible plan for using and repaying

the loan, and collateral. She will demand this reassurance

even though she, unlike a stock investor, is supposed to be

paid regardless of whether the enterprise succeeds or fails, for

she knows that borrowers sometimes fail so completely that

they go bankrupt. In the ideal, the responsible caution of the

lender counterbalances the enthusiasm of the borrower,

keeping loan losses within safe bounds and helping societymake healthy use of credit.63

When this balance is upset, however, credit becomes

dangerously excessive. And that is what has happened dur-

ing the last several decades in the provision of finance to

poorer countries. Creditors, public and private alike, knew or

were capable of learning that much of the money they lent

was going into financially questionable uses. But creditors

too often suspended judgment, became too credulous. Com-

mercial lenders fell prey to the classic go-go psychology of

financial markets. And official lenders often got caught up in


22/44

nesses, and a genuine desire to alleviate suffering through

economic development.67

In practice, development frequently lost out. American

determination to bankroll cold war allies and secure access to

resources, for example, turned Mobutu, the Philippines Fer-

dinand Marcos, and Baby Doc Duvalier into billionairesand their governments into billion-dollar debtors. In Haiti,

the U.S. governments approach was to place maximum

responsibility on the Haitian government for the selection

and design of projects even though it estimated that 63 per-

cent of recorded revenue of the Haitian government was

being misappropriated. Frances paternalism toward its for-

mer African colonies had similar results. Jean Bedel Bokassa,

leader of the Central African Republic from 1966 to 1979,

explained how it worked there: Everything around here is

financed by the French government. We ask the French for

money, get it, and waste it.68

For lending governments, geopolitics often dovetailed

with domestic politics. In the United States, the National

Foreign Trade Council, whose members include Caterpillar,

John Deere, Phillips Petroleum, and Westinghouse, lobbies

for government contributions to the World Bank and other

multilateral lenders, knowing they stand to gain from the

resulting orders for earth-movers and power plants. But it is

the bilateral export credit agencies that are the most purely

political. Even people who run them say that their taxpayer-

funded, industry-subsidizing loans make little overall eco-

nomic sense for the lending nationnever mind theborrower. But support from companies headquartered in

every major industrial nation leads to a sort of export credit

arms race. If other countries didnt do it, we wouldnt

either, said the head of the Canadian ECA around 1990.

Our approach is merely to match others. Worldwide, ECAs

have been major financers of arms sales. And ECAs today

help keep nuclear power plant makers in business by subsi-

dizing exports of a technology that has become uncompeti-

tive at home.69

Because they are essentially bankruptcy-proof, bilateral

43PRESSURE TO LEND42 STILL WAITING FOR THE JUBILEE

look as if they might have been trained to say No from

their childhood are actually trying to sell loans. Ive got

good news for you, I heard one eager contact man telling

a group of American bankers: I think theyll be able to

take your money.65

It is not hard to imagine how such lenders could havefinanced, along with many good investments, much waste as

well. In 1970, commercial lenders disbursed $967 million in

long-term loans to countries that are now members of the

Worldwatch 47. By 1982, disbursements had zoomed to $10.4

billion11 times as much. But then the crash came, and

instantly quelled the pressure to lend. Almost every year since,

commercial lenders have taken more money from these coun-

tries than they have given. Yet their outstanding commercial

debt has risen as interest has compounded even faster.66

The career of the official lenders has never been so dra-

matic. On the one hand, their slowly changing budgets andcapital quotas have generally saved them from manic

upswings in lending. On the other, their access to the richest

treasuries on earth has insulated them from losses and avert-

ed the depressive downswings.

Yet among official lenders, an array of goals have histor-

ically shouldered aside most concern about helping borrow-

ersand assuring their ability to repay what is lent. Most of

the tensions were audible in President Trumans inaugural

address at the dawn of the cold war. In the speech, Truman

vowed to press forward in what he cast as a biblical batt

third world debt ewp155

Documents